Deductions - In the production of income

Question 1

Facts:
A driver employed by the TP died as a result of injuries sustained from an accident that occurred while working. The TP had to pay damages to the widow of the employee. The TP also incurred legal costs resisting the claim. The commissioner disallowed both deductions.

Answer 1

Port Elizabeth Electric Tramway

Issue:
Are the following amounts incurred in the production of income?
1) Compensation paid to the widow?
2) Legal costs to resist the claim?

Principle:
1) What is the purpose of the expense?
2) How closely connected is that expense to the production of income?

Note: Compensation was deductible but not the legal costs as not part of the income-earning operations.

Question 2

Facts:
A company carried on a concrete engineering business. A concrete hood, which the company was supervising, collapsed; killing a workman. It was determined in the court case that the company was negligent and had to pay damages to the workman’s deceased widow. The Commissioner disallowed the company’s claim for compensation and legal costs incurred.

Answer 2

Joffee and Co

Issue:
Is the compensation to the widow and the legal costs deductible?

Principle:
If something is an inevitable concomitant of the business operations it is deductible.
Negligence resulted in the roof collapsing and is thus not an inevitable part of trade and not incurred in the production of income.

Question 3

Facts:
BP SA paid royalties to BP worldwide in terms of a trade-mark license agreement in order to display the BP licensed trademarks. The payment was expressed as a rate per litre of product sold.
SARS disallowed this as a deduction.

Answer 3

BP Southern Africa

Issue:
Are the royalty payments incurred in the production of income?

Principle:
Recurring payments for maintaining an income-earning operation are deductible.
Royalty payments are of a revenue nature and deductible if the intellectual property is used in the production of income.

Question 4

Facts:
The TP had introduced 2 schemes for the benefit of its employees: a life assurance scheme and a service bonus. The amount of the bonus or benefit varied in line with the length of the employee’s service. The TP sought to deduct both amounts.

Answer 4

Provider

Issue:
The Commissioner allowed the bonus as a deduction but would not allow the life assurance benefit paid to the dependants as a deduction.
Thus, the question is whether both amounts were expended in the production of income.

Principle:
Expenditure incurred to induce the employees to enter and remain in the service of the TP may qualify as a deduction since the purpose is to produce current or future income.
Amounts paid in terms of a service package (employment contract) are deductible.

Question 5

Facts:
Mobile Telephone Networks Holdings (Pty) Ltd incurred expenditure in respect of an audit performed. The auditors spent 94% of its time on the audit of interest income and 6% of its time on auditing the exempt dividend income. Furthermore, expenditure was incurred in respect of training fees to train staff on learning the new computerized accounting system. The system was only used in respect of interest income.

Answer 5

Mobile Telephone Network Holdings (Pty) Ltd

Issue:
In respect of the audit fees, the issue was whether the full audit fee will be deductible, even though a portion was attributable to exempt dividend income?
In respect of the training fees, are the full training fees a necessary concomitant of the income earning operations or are the training fees capital in nature?

Principle:
Incurring audit fees is necessarily attached to the performance of the TP’s income earning operations i.e. audit fees are incurred in the production of income.
Where there is a split between producing income vs exempt income (thus where audit fees are incurred for a dual purpose), apportionment should take place.
Apportioning audit fees based on time spent on areas generating exempt vs non-exempt income is not necessarily correct. Apportionment will depend on the facts of each case; a reasonable apportionment approach will thus be followed.
Training fees: If an expense is necessary in order to trade effectively, it will not be capital in nature and will be allowed as a deduction.